Under prospect theory, three components influence the risk attitude of a decision maker: the utility function, the probability weighting function, and loss aversion. Loss aversion reflects the observed behavior of decision makers' being more sensitive to losses than to gains, resulting in a utility function that is steeper for losses than for gains. Much of the empirically observed risk aversion is due to loss aversion. This paper proposes an index of loss aversion. It also demonstrates how the degree of loss aversion of two decision makers can be compared and how its influences on comparative risk aversion can be examined. The main result characterizes comparative loss aversion in terms of preferences.

other researchers in preliminary form, to encourage discussion and suggestions for revision before final publication. Opinions are solely those of the authors.

This paper examines possible barriers to securitization, focusing on behavioral responses to such novel instruments. These barriers include the difficulties of conveying the associated risks, even to investors who are sophisticated about finance (but still uncertain about model risk and structural uncertainties). Our analyses will draw on results in behavioral decision making and psychology. They will lead to proposals for empirical research and general strategies for making securities design more consonant with investor behavior.

This paper develops a general approach for the single period portfolio optimization prob-lem in a multidimensional general and partial moment space. A shortage function is defined that looks for possible increases in odd moments and decreases in even moments. A main result is that this shortage function ensures sufficient conditions for global optimality. It also forms a natural basis for developing tests on the influence of additional moments. Fur-thermore, a link is made with an approximation of an arbitrary order of a general indirect utility function. This nonparametric efficiency measurement framework permits to differen-tiate mainly between portfolio efficiency and allocative efficiency. Finally, information can, in principle, be inferred about the revealed risk aversion, prudence, temperance and other higher-order risk characteristics of investors. A mean-variance-skewness-kurtosis example on a small sample of assets serves as an empirical illustration. We also compare the relative fit of a series of lower partial moment models. Keywords: shortage function, efficient frontier, K-moment portfolios. 1

We consider what would be a desirable measure of risk. Recalling the class of risk measures introduced by Stone (1973), the authors survey measures from different academic disciplines including psychology, operations research, management science, economics and finance, which have been introduced since 1973, with the purpose of choosing an suitable measure. We introduce a general class of risk measures which extends Stone's class to include these new measures. We demonstrate that all measures which satisfy appropriate axioms, as well as those which do not but are commonly used in finance, belong to our new generalised class.

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Private equity firms are blamed for quickly extracting all of a target company’s cash, and sometimes for going even further by requesting a target company to incur additional debts – in order to be able to pay investors an additional dividend – and thus driving it into bankruptcy. Consequently, there is always a trade-off between the benefit of high extra dividends and the associated risk, due to higher debt obligations, which may cause bankruptcy. In this paper, we apply real-options theory and capital-budgeting techniques to the problem of assessing a private investor’s risk. We propose a new continuous time DCF model, which incorporates the four fundamental value drivers, among others a high debt to equity ratio, and typical characteristics for private investments like a high probability to default. We also introduce different risk measures by proposing a new measurement model that is based on the cash flow process, the associated multiple process as well as on the implied IRR of the transaction. Finally, we give some details of how such a model is implemented to provide investors as well as debt lenders with a decision support regarding different investments or investments strategies.

Acknowledgements: We thank Christiane Baumeister for providing access to the world and OECD industrial production data and Ryan Kellogg for providing the Michigan survey data on gasoline price expectations. We thank Domenico Giannone for providing the code generating the Bayesian VAR forecasts. We have benefited from discussions with Christiane Baumeister, Mike

Abstract: In deciding the monetary policy stance, central bankers need to evaluate carefully the risks the current economic situation poses to price stability. We propose to regard the central banker as a risk manager who aims to contain inflation within prespecified bounds. We develop formal tools of risk management that may be used to quantify and forecast the risks of failing to attain that objective. We illustrate the use of these risk measures in practice. First, we show how to construct genuine real time forecasts of year-on-year risks that may be used in policy-making. We demonstrate the usefulness of these risk forecasts in understanding the Fed’s decision to tighten monetary policy in 1984, 1988, and 1994. Second, we forecast the risks of worldwide deflation for horizons of up to two years. Although recently fears of worldwide deflation have increased, we find that, as of September 2002, with the exception of Japan there is no evidence of substantial deflation risks. We also put the estimates of deflation risk for the United States, Germany and Japan into historical perspective. We find that only for Japan there is evidence of deflation risks

Iowa State University does not discriminate on the basis of race, color, age, religion, national origin, sexual orientation, sex, marital status, disability, or status as a U.S. Vietnam Era Veteran. Any persons having This study outlines several possible structures for livestock revenue insurance. The policies take the form of an exotic option—an Asian basket option. The actuarially fair premiums for these policies are equal to the prices of the options they represent. Due to the complexity of pricing Asian basket options, we have combined two techniques for pricing options to reach the actuarially fair premiums. Projected premiums, producer welfare, and program efficiency are evaluated for the insurance products and existing market tools. Using efficiency ratios and certainty equivalent returns, we compare the